This introductory chapter provides an overview of the aspects of asset prices that are covered in the book: namely, dynamics, volatility, prediction and available information. A brief summary of each of the other chapters is also provided.
From the author - This first part of the book provides a foundation for the empirical modeling of time series of returns from financial assets. Chapter 2 explains how returns from investments are calculated from prices. A set of regularly observed prices can be used to define a time ... click here for more details.
From the author - Chapter 3 commences with a summary of the theoretical properties of random variables. It then continues with the definitions and properties of important probability models for time-ordered sequences of random variables, called stochastic processes. Consideration is given to a variety of stochastic processes that are used ... click here for more details.
From the author - Chapter 4 surveys general statistical properties of time series of daily returns that are known as stylized facts. Any credible stochastic process that represents asset price dynamics must be able to replicate these facts. Three stylized facts are particularly important. First, the distribution of returns is ... click here for more details.
From the author - The random walk hypothesis asserts that price changes are in some way unpredictable. Chapter 5 defines and evaluates the popular variance-ratio test of the hypothesis, which relies on a comparison between the variances of single-period and multi-period returns.
From the author - Chapter 6 considers several further tests of the random walk hypothesis which use a variety of methods to look for evidence that tomorrow’s return is correlated with some function of previous returns. Evidence against the random walk hypothesis is found that is statistically significant but not ... click here for more details.
From the author - Chapter 7 evaluates the performance of trading rules and uses their results to appraise the weak form of the efficient market hypothesis. These rules would have provided valuable information about subsequent prices in past decades, but their usefulness may now have disappeared.
From the author - This part of the book covers the dynamics of discrete-time asset price volatility. Chapter 8 summarizes five interpretations of volatility, all of which refer to the standard deviation of returns. It then reviews a variety of reasons for volatility changes, although these can only provide a ... click here for more details.
From the author - Chapter 9 defines ARCH models and provides examples based upon some of the most popular specifications. These models specify the conditional mean and the conditional variance of the next return as functions of the latest return and previous returns. They have proved to be highly successful ... click here for more details.
From the author - Chapter 10 describes more complicated ARCH models and the likelihood theory required to perform hypothesis tests about ARCH parameters. Guidance concerning model selection is included, based upon tests and diagnostic checks.